Twenty First Century Fox will report its Q4 fiscal 2014 earnings on August 6 (Fiscal years end with June). A continued push to add sports programming will increase costs as the company has entered into several sports rights deals, including Major League Soccer. Moreover, a decline in ratings for Fox News and Fox Broadcasting will weigh over the earnings call as well.

While Fox News continued to remain at top spot for 50th straight quarter, it saw a significant decline in ratings as compared to the prior year period. Fox’s broadcasting network also saw a decline in ratings for Q2 and ended the 2013-14 prime time season at the fourth spot in terms of viewership. The broadcasting network’s disappointing performance can be attributed to a decline in the audience for some of its popular shows including American Idol and Glee. We believe these lower ratings and higher programming costs weighed on Fox’s quarterly performance and earnings.

Fox’s movie business likely did well in the June quarter, however, driven by the success of X-Men: Days of Future Past and Rio 2, both of which performed well at the box office globally.

Fox is eyeing its rival media house Time Warner and was rebuffed in an $80 billion bid last month. We’ll be closely watching for any update on this front and if the company plans to come up with a fresh offer for Time Warner.

A Drop in Ratings at Cable and Broadcasting Networks will Weigh Over Earnings

Fox News has stayed at top for a long time and continues to enjoy higher ratings and viewership among the news networks in the U.S. However, the network was down 20% in total day and 16% in primetime in total viewers as compared to the prior year quarter. This is its lowest quarterly performance since 2001. While the fall in news network ratings is visible across the board, Fox’s decline was far worse than MSNBC’s. In the previous quarter, the company managed to grow its top line as well as bottom line due to higher rates. Revenues at the cable networks increased 12% to $3.15 billion while the EBITDA grew 10% to $1.07 billion, driven by higher affiliate fees in the March quarter. We are eager to see if affiliate fees continued to drive growth in the June quarter.

Fox’s broadcasting ended the 2013-14 season at fourth place amid decline in some of its popular shows such as American Idol. The decline in ratings directly impacts advertising revenue, which is the bread and butter of broadcasting networks. The impact of lower ratings is already visible in the upfront sales, where Fox saw lower volume and moderate gains in ad pricing. We will be watching for any update on plans to turnaround the decline in ratings. For the time being, our forecast for Fox Broadcasting and MyNetworkTV revenue stands at $5.27 billion in 2014.

Movie Business Likely To See Solid Growth

We expect higher theatrical revenues from the Filmed Entertainment segment given the success of the movies released during the quarter. X-Men: Days of Future Past was made with a production budget of $200 million and has grossed over $740 million at the box-office globally. Rio 2 was another hit for the studio grossing close to $500 million at the box-office.

Fox currently ranks No. 1 with market share of 18.5% at the U.S. box-office. The studio will continue to benefit from its movies in the next quarter as well, driven by the success of How To Train Your Dragon 2 and Dawn of the Planet of Apes. Accordingly, we believe the studio saw higher EBITDA in the June quarter as compared to $117 million posted in the prior year period.

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